how house price dynamics and credit constraints affect the ......home equity comprises about half of...

How House Price Dynamics and Credit Constraints affect the

Equity Extraction of Senior Homeowners

Stephanie Moulton, John Glenn College of Public Affairs, The Ohio State University

Donald Haurin, Department of Economics, The Ohio State University

Samuel Dodini and Maximillian Schmeiser, Federal Reserve Board

Disclaimer:

The research reported herein is being performed pursuant to a grant from the

MacArthur Foundation as part of the “How Housing Matters” Research Competition

and with funding from The U.S. Department of Housing & Urban Development’s

Office of Policy Development and Research (PD&R). The opinions and

conclusions expressed are entirely those of the authors and do not represent the

opinions of the MacArthur Foundation or HUD.

The views expressed in this paper are those of the authors and do not necessarily

represent the views of the Federal Reserve Board, the Federal Reserve System, or

their staffs.

1. Empirical Modeling of Reverse Mortgage Borrower Behavior • Take-up of HECMs (and other equity extraction products among seniors)

• HECM technical default (property tax and insurance default)

• HECM loan terms, withdrawal behaviors and termination outcomes

• Equity extraction (including HECMs) and longer term credit outcomes

2. Survey of Counseled Seniors • Longer term well-being of HECM borrowers

• May 2014-July 2015, about 2,000 respondents: (1) current HECM

borrowers, (2) terminated HECM borrowers, and (3) seniors who sought

counseling but did not get a reverse mortgage.

3. Post Origination Monitoring Pilot • RCT design; financial planning and reminders after closing

• Launched January, 2015

Research Program (2012-2017)

Motivation

Home equity is an important part of a senior household’s financial portfolio:

Approximately 80% of households over the age of 62 own their homes

(Poterba et al. 2011)

Home equity comprises about half of seniors’ median net wealth (2013

SCF)

Home equity is a significant source of retirement funds for baby boomers

(Lusardi and Mitchell 2007; Wolff 2007)

Different options to extract equity:

Selling and moving

Cash-out refinancing, second liens or HELOCs

Reverse mortgages- federally insured HECMs

Research Questions

What factors are associated with seniors’ extraction of equity through

various channels, including a reverse mortgage?

• Do neighborhood house price dynamics and credit conditions

differentially affect originations by channel? • Do homeowners in credit constrained areas respond differentially to an

increase in house prices than homeowners in non-constrained areas?

• Do high minority share neighborhoods respond differently than low

minority share neighborhoods? (50+% minority vs 90+% white)

• Is the share of equity extracted through particular channels

differentially associated with foreclosure rates among extractors?

Previous studies have generally focused on the broader population and exclude

reverse mortgages (Hurst and Stafford 2004; Mian and Sufi 2011; Do 2012;

Bhutta and Keys 2014; Duca and Kumar 2014; LaCour-Little et al. 2014). Further,

they do not jointly model different channels of equity extraction.

Equity Extraction

Source: Author’s calculations from HUD HECM data and the New York Fed’s Consumer Credit Panel Data

0.000

0.010

0.020

0.030

0.040

0.050

0.060

0.070

2004 2005 2006 2007 2008 2009 2010 2011 2012

Mean Equity Extraction Origination Rate using any Channel as a Proportion of the

Population 62 and older, by Year

Equity Loan

Equity Extraction by Channel

0.000

0.020

0.040

0.060

0.080

0.100

0.120

0.140

0.000

0.010

0.020

0.030

0.040

0.050

2004 2005 2006 2007 2008 2009 2010 2011 2012 HE

CM

Sh

are

of

Ori

gin

ati

on

s

Mean Equity Extraction Origination Rate as a Proportion of the

Population 62 and older, by Year

HELOC Cashout Refinance

Closed-End Second HECM

HECM Share


Geographic Variation (U.S.): HELOCs


Mean HELOC Origination Rate as a Proportion

of the Population 62 and older, 2004-2012

Geographic Variation (U.S.): Cash-Out Refinancing


Mean Cash-Out Refinancing Origination Rate as a Proportion


Geographic Variation (U.S.): HECMs


Mean HECM Origination Rate as a Proportion


Geographic Variation


Mean HELOC Origination

Rate as a Proportion

of the Population 62 and

older, 2004-2012



Mean Cash-Out Refinancing

Origination Rate as a

Proportion of the Population

62 and older, 2004-2012



Mean HECM Origination

Rate as a Proportion of the

Population 62 and older,

2004-2012

Theoretical Expectations

• House prices & channel of extraction Higher house prices, wealth effect (+ all channels); also relax borrowing constraint,

allowing access to products with lower LTV requirements (+ HELOC and HECMs)

As house prices are increasing, preserve option to extract again in future periods;

not lock into high initial cost product (- HECM)

As house prices are decreasing, lock in house values today (+HECM)

• Credit conditions & channel of extraction Supply side credit availability (+ forward originations)

Household credit history, credit standards can create binding constraint (- HELOC)

Household liquidity constraints (+ HELOC and HECM)

• House price*credit constraints Credit constrained borrowers may be more responsive to house price increases;

originate through channels with relaxed credit constraints (+ cash out refinancing)

• Neighborhood demographics (minority share) & channel of extraction

Endowment effects, different levels of explanatory factors in minority areas

Differential responses to explanatory factors due to financial literacy, experience

Data Sources & Sample

Data Sources 1. New York Federal Reserve’s Consumer Credit/Equifax Panel (CCP) database,

2004-2012

• 4th quarter, 62 or older, +12 million credit profiles

• Aggregated to ZIP code and year

2. HUD HECM database and actuarial database, 2004-2012

• 697,772 originations

• Aggregated to ZIP code and year

3. CoreLogic, ZIP code level data, 2004-2012

• House price and HPI for non-distressed sales

4. IRS (SPEC) Tax data, 2004-2012

• Elderly tax filing data by ZIP code, median adjusted gross income (AGI)

5. ACS data, ZIP code level demographic indicators, 2005-2010

• Data from the 2000 U.S. Census to interpolate values for 2003 and 2004

Sample Limit to ZIP codes within CBSAs with HPI data across all years, and to those with at

least 30 CCP records for consumers aged 62 or older in a given year =

• 5,495 ZIP codes (covers about 45% of the full population)

Resulting sample = 39,596 unique ZIP code and year combinations

Empirical Model: Seemingly Unrelated Regression

Yzt = β0 + β1HPzt + β2CCzt + β3Xzt + α1IChannel,zt + γm + δt + uzt

Y= (1) HELOC origination rate

(2) Cash-out refinancing origination rate

(3) Second lien origination rate

(4) HECM origination rate

For each ZIP code z at time t

HP = house price dynamics (median repeat sales price, HPI growth rate)

CC = credit conditions (credit approval rate, credit utilization rate, credit score, etc.)

X = control variables (median AGI, mortgage debt, median age, black, Hispanic, etc.)

I = interest rate for extraction channel (averaged over the year within the ZIP code)

γ = CBSA fixed effects

δ = year fixed effects

• Alternative specifications include interactions, HP*CC

• Estimate subsample regressions in ZIP codes with high levels of racial homogeneity

Allow error terms of 4

equations to be correlated,

common component and

random component

Findings: Overall

SUR Estimates, % Population 62 + Equity Extraction Method, 2004-2012 (Select Variables Shown)

Values = regression coefficient divided by the mean percentage of originations

HELOC Cash-Out Refinance

Closed-End Second

HECM

Variable b/ȳ b/ȳ b/ȳ b/ȳ Median Real Repeat Sales Price (ln) 0.006 *** 0.001 *** -0.001 *** 0.001 ***

HPI Growth Rate, Positive 0.598 *** 0.408 *** -0.145 -2.289 *** HPI Growth Rate, Negative -0.018 -0.295 ** 0.168 1.016 *** Credit Approval Ratio (All) 0.734 *** 1.096 *** 0.598 *** 0.144 **

Median Credit Score 0.002 *** -0.006 *** -0.002 *** -0.005 ** Median Revolving Credit Utilization Rate 1.115 *** -0.145 0.144 0.621 **

Median IRS AGI (Monthly, thousands) 0.070 *** -0.076 *** -0.059 *** -0.176 *** Black (Share of Population) -0.328 *** 0.708 *** 0.040 1.305 ***

Hispanic (Share of Population) -0.171 *** 0.410 *** -0.043 0.075 Year & CBSA Fixed Effects Y Y Y Y

R-Squared 0.542 0.239 0.215 0.467 Dependent Variable Mean 0.024 0.008 0.007 0.002

*** p<0.01, ** p<0.05, * p<0.1

Findings: House Price Growth*Credit Constraints

Credit Constraint Interactions with Positive and Negative HPI Growth Rate

Panel A: Credit Score Interactions

% Δ HELOC % Δ

Cash-Out

% Δ

Second % Δ HECM % Δ Rate

At mean credit score (784)

0.01 Increase in HPI Rate 0.9257 0.2285 -0.0763 -2.1108 0.493

0.01 Decrease in HPI Rate -0.1375 -0.2538 0.2379 0.6427 -0.065

One standard deviation (20 points) below the mean credit score (763)

0.01 Increase in HPI Rate 0.2821 0.5881 -0.2253 -2.3539 0.150

0.01 Decrease in HPI Rate 0.0819 -0.3088 0.0110 1.6224 0.063

One standard deviation (20 points) above the mean credit score (803)

0.01 Increase in HPI Rate 1.5331 -0.1110 0.0644 -1.8814 0.836

0.01 Decrease in HPI Rate -0.3446 -0.2020 0.4520 -0.2821 -0.192

Findings: Geographic Subsample Regressions

0.04

0.0176

0.0106 0.0083

0.0035

0.0415

0.0262

0.0067 0.007

0.0016

00.0050.01

0.0150.02

0.0250.03

0.0350.04

0.045

AnyOrigination

HELOC Cash-outRefinance

Closed-EndSecond

HECM

Origination Rate as a Proportion of the Population 62 and older, 2004-2012

All ZIPs >50% Black >90% White

HELOC Cash-Out Second HECM

Minority Area Difference - + + +

Endowment Effect + - - -

Behavioral Response + - + +


SUR Estimates, % Population 62 + Equity Extraction Method, 2004-2012, by Geographic Subsamples

HELOC HELOC Cash-Out Refinance

Cash-Out Refinance

High

Minority Low

Minority High

Minority Low

Minority Variable b/ȳ b/ȳ b/ȳ b/ȳ

Median Real Repeat Sales Price (ln) 0.004 *** 0.007 *** 0.000 0.000 HPI Growth Rate, Positive 0.020 0.637 *** 0.447 0.041

HPI Growth Rate, Negative -0.111 -0.542 *** -0.826 ** 0.091 Credit Approval Ratio (All) 0.790 ** 0.618 *** 1.226 *** 0.630 ***

Median Credit Score 0.002 * 0.001 -0.001 -0.010 *** Median Revolving Credit Utilization Rate 0.457 2.000 *** 0.594 -1.881 ***

Median IRS AGI (Monthly) 0.120 ** 0.072 *** -0.120 ** -0.030 *

Black (Share of Population) -0.565 ** 0.342 0.561 ** -0.087 Hispanic (Share of Population) -0.841 ** 0.086 0.159 0.282

Year & CBSA Fixed Effects Y Y Y Y R-Squared 0.485 0.524 0.408 0.179

Dependent Variable Mean 0.018 0.026 0.011 0.007 *** p<0.01, ** p<0.05, * p<0.1


SUR Estimates, % Population 62 + Equity Extraction Method, 2004-2012, by Geographic Subsamples

Closed-End

Second Closed-End

Second HECM HECM

High

Minority Low

Minority High

Minority Low

Minority Variable b/ȳ b/ȳ b/ȳ b/ȳ

Median Real Repeat Sales Price (ln) 0.000 -0.001 * 0.002 *** 0.000 *** HPI Growth Rate, Positive -0.478 0.089 -3.914 *** -2.169 ***

HPI Growth Rate, Negative -0.260 0.447 ** 0.070 2.594 *** Credit Approval Ratio (All) 0.739 * 0.446 *** 0.343 -0.208 **

Median Credit Score -0.001 -0.006 *** 0.000 0.003 * Median Revolving Credit Utilization Rate -0.282 0.861 0.250 -0.062

Median IRS AGI (Monthly) -0.035 -0.047 *** -0.326 *** -0.189 *** Black (Share of Population)

Hispanic (Share of Population) Year & CBSA Fixed Effects Y Y Y Y

R-Squared 0.296 0.208 0.617 0.517 Dependent Variable Mean 0.008 0.007 0.004 0.002

*** p<0.01, ** p<0.05, * p<0.1

Findings: Foreclosure Rates by Extraction Channel

0.021 0.027

0.033 0.033

0.023 0.017

0.022

0.000

0.020

0.040

0.060

0.080

0.100

0.120

2004 2005 2006 2007 2008 2009 2010

Fore

clo

sure

Rat

e

Origination Year

Foreclosure Rates as of 2013(Q4), by Origination Cohort and Extraction Channel

Any Extraction

HELOC

Cash-Out Refinance

Closed-End Second

HECM

Findings: Foreclosure Rates by Extraction Channel

OLS, Proportion of Extractors Foreclosing as of

Q42013, By Origination Cohort (Select Years) 2004 2006 2007 2010

Cash-Out Refinancing 0.041*** 0.045*** 0.063*** 0.034***

Closed-End Second 0.002 0.005 0.012 0.001

HECM 0.004 0.014 -0.016 -0.004

% w/Mortgage Past Due 0.079* 0.080** 0.095*** 0.126***

Credit Utilization Rate 0.010** 0.004 0.0197** -0.025***

Credit Score (100s) -0.016*** -0.022*** -0.013*** -0.030***

Credit Approval Ratio -0.018 -0.056*** -0.045*** -0.051***

Constant 0.148** 0.290*** 0.148** 0.447***

Observations 4,555 4,646 4,586 2,828

CBSA Fixed Effects Yes Yes Yes Yes

R-squared 0.203 0.234 0.231 0.243

*** p<0.01, ** p<0.05, * p<0.1

For 2007 Originations:

A 10 percentage point

increase in cash-out

refinancing is associated

with a 19% increase in the

foreclosure rate among

extractors (0.0063/0.033)

A 10 point increase in

median credit score is

associated with an 4%

decrease in the

foreclosure rate

(0.0013/0.033)

If HECMs were replaced

by cash-out refinancing,

the foreclosure rate could

have been 12% higher

Conclusions

• Significant differences in the determinants of the origination of a home equity

extraction loan by channel:

Variation in responsiveness to house prices by channel

Variation in responsiveness to credit conditions by channel

Variation in responsiveness to house prices in credit constrained areas by

channel

• Differences in channel use in high vs. low minority areas is due in part to

differences in endowments and differences in behavioral responses.

Minority areas less responsive to house price increases and decreases (to

originate HELOCs or HECMs)

Low-minority areas less likely to use cash-out refinancing or HECMs when

credit conditions improve

• The usage of particular channels in an area is significantly associated with

foreclosure rates among extractors.

An increase in the share of extractions through cash-out refinancing is

associated with significantly higher foreclosure rates

While HECMs are originated in similarly credit constrained areas, HECM

origination share in an area is not significantly associated with foreclosure

Discussion & Implications

• As of April 2015 HECM lenders must assess a borrower’s “ability to pay” and

follow minimum credit, debit and affordability standards. • In a prior paper, we estimate a 6 percent reduction in HECM volume due to the

credit portion of the policy, based on the proportion of households who would

“fail” the criteria and be unable to afford an escrow for taxes and insurance.

• We estimate that the policy could reduce tax and insurance default by as much as

40 percent.

• Using the characteristics of the households who we estimate would be excluded

from HECMs based on the policy, we predict the probability that they would instead

obtain another equity extraction loan. We estimate that these excluded

households would be very unlikely to have originated a HELOC, but would be

more likely to have originated a second lien or cash-out refinance loan instead

of a HECM.

• To the extent that HECM loans have built in protections (e.g., insured against

negative equity), these households may turn to more “risky” alternatives.

Moulton, S., D. Haurin and W. Shi. 2015. An Analysis of Default Risk in the Home Equity

Conversion Mortgage (HECM) Program. Journal of Urban Economics

Thank You!

1. Empirical Modeling • HECM terminations & default

• Take-up of HECMs

• HECM loan terms and withdrawal behaviors

2. Survey of Counseled Seniors • Longer term well-being of HECM borrowers

• May 2014-May 2015, about 2,000 respondents: (1) current HECM

borrowers, (2) terminated HECM borrowers, and (3) seniors who sought

counseling but did not get a reverse mortgage.

3. Post Origination Monitoring Pilot • RCT design; financial planning and reminders after closing

• Launched January, 2015


Table 1: Descriptive Statistics for Model Variables, Full Sample (N=39,596)

mean sd min max

HELOC Origination Rate 0.0244 0.0209 0.0008 0.2670

Cash-out Refinance Origination Rate 0.0078 0.0079 0 0.1470

Closed-End Second Origination Rate 0.0066 0.0073 0 0.0771

HECM Origination Rate 0.0019 0.0020 0 0.0293

Median Repeat Sales Price (ln) 12.4800 0.5600 10.2800 14.9700

HPI Growth Rate, Positive 0.0460 0.0762 0 0.7840

HPI Growth Rate, Negative 0.0367 0.0568 0 0.5690

HELOC ZIP-level Interest Rate 0.0579 0.0126 0.0200 0.1225

First Mortgage ZIP-level Interest Rate 0.0538 0.0088 0.0250 0.0825

Closed End Second ZIP-level Interest Rate 0.0668 0.0102 0.0206 0.1161

Average HECM MSA-level Interest Rate 0.0561 0.0004 0.0425 0.0657

Credit approval rate (All) 0.6720 0.0836 0.2310 1.0000

Median Credit Score 783.58 20.18 634 820

Median Revolving Credit Utilization Rate 0.0793 0.0478 0.0152 0.5760

Past Due Mortgage Rate 0.0165 0.0198 0 0.2310

Bankruptcy Rate 0.0090 0.0090 0 0.1360

Foreclosure Rate 0.0027 0.0047 0 0.0760

Revolving Debt to Income Ratio (1 yr lag) 0.0204 0.0136 0 0.5670

Share of Population with Mortgage (1 yr lag) 0.3370 0.1090 0.0502 1.0000

Median Mortgage Debt to Median Sales Price (1 yr lag) 0.3720 0.1560 0 2.4420

Median Monthly Mortgage Payment (1 yr lag) 0.8840 0.3380 0.1360 3.5630

Median IRS AGI (Monthly) 3.5520 1.3520 0.4170 8.3330

Median Age of Seniors with Credit Files 72.4600 2.3100 65 84

Black (share of population) 0.0980 0.1460 0 0.9810

Hispanic (share of population) 0.1300 0.1510 0 0.9750

Our other papers: • Haurin, D., C. Ma, S. Moulton, W. Shi, M. Schmeiser, and J. Seligman. (Forthcoming). Spatial

Variation in Reverse Mortgages Usage: House Price Dynamics and Consumer Selection.

Journal of Real Estate Finance and Economics.

• Moulton, S., D. Haurin and W. Shi. 2015. An Analysis of Default Risk in the Home Equity

Conversion Mortgage (HECM) Program. Journal of Urban Economics (forthcoming)

• Working Papers: (1) Reverse mortgage choice and the influence of counseling; (2) Dynamic

model of reverse mortgage outcomes; (3) Seniors’ accuracy of home valuation


Reverse Mortgage 101

• In the U.S, the federally insured Home Equity Conversion Mortgage (HECM)

comprises 95% of the market. Small, but potentially growing market.

• Extract equity from the home through a mortgage that does not become due

until the last borrower sells the home, moves out permanently, or dies, as long

as the borrower meets the obligations of the mortgage note

• Obligations include living in the home as primary residence, pays

property taxes, homeowners insurance, homeowners association dues

and assessments, and maintains the home.

• No payments on the loan are required during the life of the loan. Money

borrowed, plus associated interest and fees, are added to the balance due

that continues to grow over time (mortgage “in reverse”)

• Line of Credit

• Tenure or Term (similar to annuity)

• Lump Sum Distribution

• Some combination of the above

Reverse Mortgage Debt

0

50,000

100,000

150,000

200,000

250,000

300,000

350,000

1 5 10 15 20

$ A

mo

un

t

Time (Years)

Lump Sum

Expected

Home Value

Maximum Claim Amount (home value at closing)= $225,000

Initial Principal Limit = $125,000

Reverse Mortgage Debt

0

50,000

100,000

150,000

200,000

250,000

300,000

350,000

1 5 10 15 20

$ A

mo

un

t

Time (Years)

Available

Credit Line

Expected

Home Value

Credit Line or

Term/Tenure

Payments

Maximum Claim Amount (home value at closing)= $225,000

Initial Principal Limit = $125,000

Source: CFPB 2012

http://www.ginniemae.gov/doing_business_with_ginniemae/issuer_resources/ginni

enet/NewIssuerTrainingPresentations/20131122_HMBS_Panel.pdf

how house price dynamics and credit constraints affect the ......home equity comprises about half of...

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